Cambridge IGCSE Accounting (0452) – Complete Syllabus Notes
Learning Objectives
- Understand the fundamental concepts and principles of accounting.
- Record and verify financial transactions using the double‑entry system.
- Apply key accounting procedures (depreciation, accruals, doubtful debts, inventory valuation).
- Prepare the main financial statements for different types of entities.
- Analyse and interpret financial information using standard ratios.
- Link accounting policies to the underlying accounting principles.
1 The Fundamentals of Accounting
1.1 Purpose of Accounting
- Record, classify and summarise financial transactions.
- Provide information for decision‑making, accountability and control.
- Monitor the progress of a business towards its objectives (performance measurement).
1.2 Book‑keeping vs. Accounting
- Book‑keeping – the systematic recording of all financial transactions in the books of prime entry.
- Accounting – the wider process that includes book‑keeping, classification, summarising, interpretation and communication of information.
1.3 The Accounting Equation
Assets = Liabilities + Owner’s Equity
Every transaction must keep this equation in balance.
1.4 Types of Business Organisations
- Sole trader
- Partnership
- Limited company
- Clubs & societies (non‑profit)
1.5 Users of Accounting Information
- Owners / shareholders
- Managers
- Creditors & investors
- Employees
- Government & tax authorities
2 Sources and Recording of Data
2.1 Business Documents (Source Documents)
- Invoices, receipts, credit/debit notes
- Bank statements, payroll sheets
- Purchase orders, sales orders
2.2 Books of Prime Entry
| Book | Purpose |
|---|
| Sales journal | Record credit sales |
| Purchases journal | Record credit purchases |
| Cash book | Record all cash receipts & payments |
| General journal | Record non‑repeating or adjusting entries |
2.3 Division of the Ledger
| Ledger Division | Typical Accounts |
|---|
| Sales Ledger (Debtors) | Trade Receivables, Debtors Control, Sales Returns |
| Purchases Ledger (Creditors) | Trade Payables, Creditors Control, Purchases Returns |
| Nominal / General Ledger | Revenue, Expenses, Capital, Drawings, Accruals, Pre‑payments |
2.4 The Double‑Entry System
- Every transaction affects at least two accounts.
- One account is debited, another is credited – total debits = total credits.
2.5 Ledger Posting
Post each journal entry to the relevant T‑accounts (or computerised ledger). The ledger shows the running balance of every account.
2.6 Discounts
- Trade discount – reduction in the list price granted at the point of sale. Not recorded in the books.
- Cash discount – incentive for early payment. Recorded in the books.
Example – Cash Discount
Invoice issued: £1 200 payable within 30 days, 2% cash discount if paid within 10 days.
If paid within discount period:
Debit Bank £1 176
Debit Discount Received £24
Credit Accounts Payable £1 200
2.7 Imprest System for Petty Cash
- Establish a fixed petty‑cash fund (e.g., £100) and record it as Petty Cash (asset).
- Payments are made from the fund and recorded in a Petty Cash Book.
- When the fund is low, reimburse the amount spent and restore the fund to its original balance.
Sample entry when replenishing the fund
Debit Petty Cash Expenses £45
Credit Bank £45
3 Verification of Accounting Records
3.1 Trial Balance
- Prepared at the end of the accounting period.
- Lists all ledger balances in two columns – debit and credit.
Purposes of a Trial Balance
- Check that total debits equal total credits.
- Detect certain types of errors (e.g., single‑sided entry, commission error).
- Provide the starting point for preparing the financial statements.
Limitations of a Trial Balance
- Will not detect errors of omission, errors of principle, or transactions posted to the wrong accounts with the correct debit/credit totals.
- Will not detect transposition errors that happen to balance (e.g., £540 posted as £450 and £450 posted as £540).
3.2 Common Errors and How to Detect Them
| Error Type | Effect on Trial Balance |
|---|
| Omission of a transaction | No effect |
| Commission error (debit instead of credit) | Totals differ |
| Transposition error (e.g., 540 instead of 450) | Totals differ |
| Single‑sided entry | Totals differ |
3.3 Suspense Accounts
- Used when a discrepancy is found but the exact cause is not yet known.
- Temporary holding account – cleared once the error is identified.
Example – Posting to a Suspense Account
Error discovered: Sales of £2 500 recorded as £2 050.
Debit Suspense Account £450
Credit Sales £450
(When the error is located, the suspense entry is reversed.)
3.4 Bank Reconciliation Statement
- Start with the cash book balance.
- Add deposits in transit.
- Deduct outstanding cheques.
- Adjust for bank errors.
- The result should equal the bank statement balance.
3.5 Control Accounts
Summarise detailed subsidiary ledger balances (e.g., Trade Receivables Control Account, Trade Payables Control Account). They provide a quick check that the total of the subsidiary ledgers agrees with the general ledger.
Worked Example – Trade Receivables Control Account
| Date | Details | Debit (£) | Credit (£) | Balance (£) |
|---|
| 1 Apr | Opening balance | 5 200 | | 5 200 Dr |
| 5 Apr | Sales to A Ltd (credit) | 1 500 | | 6 700 Dr |
| 10 Apr | Cash received from B Ltd | | 800 | 5 900 Dr |
| 30 Apr | Closing balance | | | 5 900 Dr |
The total of the individual debtor accounts in the subsidiary ledger must also be £5 900. If not, an error exists and the suspense account can be used to hold the difference until it is resolved.
4 Accounting Procedures
4.1 Capital vs. Revenue Expenditure
- Capital expenditure – creates or enhances an asset (e.g., purchase of machinery). Recorded as an asset and depreciated.
- Revenue expenditure – incurred to earn revenue in the current period (e.g., repairs, wages). Recorded as an expense.
4.2 Depreciation
Allocation of the cost of a tangible asset over its useful life.
| Method | Formula / Calculation | When Used |
|---|
| Straight‑line |
Annual Depreciation = (Cost – Residual Value) ÷ Useful Life |
Most common for plant & equipment. |
| Reducing‑balance (written‑down) |
Depreciation = Opening Net Book Value × Depreciation Rate |
When assets lose value faster in early years. |
| Revaluation |
Adjust asset to fair market value; treat excess as revaluation reserve. |
For assets with volatile market values. |
4.3 Accrued & Pre‑paid Items
- Accrued expenses – costs incurred but not yet paid (e.g., salaries payable). Recorded as expense and liability.
- Accrued income – revenue earned but not yet received (e.g., interest receivable).
- Pre‑paid expenses – cash paid in advance (e.g., insurance). Recorded as asset, then expense over time.
- Deferred income – cash received before the related service is performed.
4.4 Doubtful & Irrecoverable Debts
- Identify debts unlikely to be collected.
- Write‑off irrecoverable debts directly to the profit and loss account.
- For doubtful debts, create a provision (contra‑asset) and expense the estimated amount.
4.5 Valuation of Inventory
4.5.1 Key Concepts
- Cost of inventory – purchase price + import duties + carriage‑in + handling + other directly attributable costs.
- Net Realisable Value (NRV) – estimated selling price less estimated costs of completion and disposal.
- Lower of Cost or NRV – inventory must be recorded at the lower of its cost and its NRV.
4.5.2 Formulae
Cost of Goods Sold (COGS):
$$\text{COGS} = \text{Opening Stock} + \text{Purchases} + \text{Carriage In} - \text{Closing Stock}$$
Write‑down (if NRV < Cost):
$$\text{Write‑down} = \text{Cost} - \text{NRV}\quad(\text{when Cost > NRV})$$
4.5.3 Steps to Prepare a Simple Inventory Valuation Statement
- Determine opening stock (cost).
- Add all purchases (including carriage‑in, duties, handling).
- Calculate “Cost of Goods Available for Sale”.
- Physical count of closing stock.
- Compute NRV of closing stock.
- Compare cost of closing stock with its NRV; use the lower amount.
- If NRV is lower, record a write‑down entry (debit Loss on Inventory Write‑down, credit Inventory).
- Deduct the valued closing stock from “Cost of Goods Available for Sale” to obtain COGS.
4.5.4 Worked Example 1 – No Write‑down (Cost < NRV)
| Item | Units | Cost per unit (£) | Total Cost (£) | Estimated Selling Price (£) | Estimated Costs of Completion & Disposal (£) | NRV per unit (£) |
| Opening Stock | 200 | 5.00 | 1 000 | 7.00 | 0.50 | 6.50 |
| Purchases | 800 | 5.20 | 4 160 | 7.00 | 0.50 | 6.50 |
| Closing Stock (physical) | 250 | 5.20 | 1 300 | 7.00 | 0.60 | 6.40 |
NRV of closing stock = 250 × 6.40 = £1 600.
Cost (£1 300) < NRV (£1 600) → no write‑down.
| Description | Amount (£) |
|---|
| Opening Stock | 1 000 |
| Purchases | 4 160 |
| Cost of Goods Available for Sale | 5 160 |
| Closing Stock (lower of cost or NRV) | 1 300 |
| Cost of Goods Sold (COGS) | 3 860 |
| Write‑down to NRV | 0 |
4.5.5 Worked Example 2 – Write‑down Required (NRV < Cost)
| Item | Units | Cost per unit (£) | Total Cost (£) | Estimated Selling Price (£) | Estimated Costs of Completion & Disposal (£) | NRV per unit (£) |
| Closing Stock (physical) | 150 | 8.00 | 1 200 | 9.00 | 1.30 | 7.70 |
NRV = 150 × 7.70 = £1 155.
Cost (£1 200) > NRV (£1 155) → write‑down of £45.
| Description | Amount (£) |
|---|
| Closing Stock (cost) | 1 200 |
| NRV of Closing Stock | 1 155 |
| Write‑down required | 45 |
| Valued Closing Stock (lower of cost or NRV) | 1 155 |
4.5.6 Journal Entry for Write‑down
Debit Loss on Inventory Write‑down £45
Credit Inventory £45
4.5.7 Practice Question (Inventory Valuation)
Company XYZ – Year ended 31 March 2026
- Opening stock: 150 units @ £8 each.
- Purchases: 500 units @ £9 each; carriage‑in £300.
- Closing stock (physical): 200 units. Estimated selling price £12 per unit, estimated costs of completion & disposal £1 per unit.
Prepare the inventory valuation statement and calculate COGS.
5 Preparation of Financial Statements
5.1 Income Statement (Profit & Loss Account)
Shows the results of operations for the period – revenue, cost of goods sold, gross profit, expenses and net profit.
5.2 Statement of Financial Position (Balance Sheet)
Shows the financial position at a point in time – assets, liabilities and owner’s equity.
5.3 Cash Flow Statement (Optional for 0452)
Summarises cash inflows and outflows from operating, investing and financing activities.
6 Analysis and Interpretation
6.1 Common Ratios (Appendix)
- Liquidity ratios – Current Ratio, Quick Ratio.
- Profitability ratios – Gross Profit Margin, Net Profit Margin.
- Efficiency ratios – Inventory Turnover, Receivables Turnover.
- Solvency ratios – Debt‑to‑Equity, Interest Cover.
6.2 How Ratios Aid Decision‑Making
- Identify strengths and weaknesses.
- Compare performance over time or with industry benchmarks.
- Assist managers, investors and creditors in assessing risk and profitability.
7 Accounting Principles and Policies
- Accruals concept – recognise income and expenses when earned or incurred.
- Consistency – use the same accounting methods from period to period.
- Going concern – assume the business will continue to operate.
- Prudence – do not over‑state income or assets, do not under‑state liabilities.
- Materiality – disclose items that could influence decisions.
Appendix – Accounting Ratios (Summary Table)
| Ratio | Formula | Interpretation |
|---|
| Current Ratio | Current Assets ÷ Current Liabilities | Liquidity – ability to meet short‑term obligations. |
| Quick Ratio | (Current Assets – Inventory) ÷ Current Liabilities | Liquidity excluding stock. |
| Gross Profit Margin | Gross Profit ÷ Sales × 100% | Profitability of core trading activity. |
| Net Profit Margin | Net Profit ÷ Sales × 100% | Overall profitability after all expenses. |
| Inventory Turnover | COGS ÷ Average Inventory | Efficiency of stock management. |
| Receivables Turnover | Credit Sales ÷ Average Trade Receivables | Effectiveness of credit control. |
| Debt‑to‑Equity Ratio | Total Liabilities ÷ Owner’s Equity | Financial leverage and risk. |
| Interest Cover | Profit Before Interest and Tax ÷ Interest Expense | Ability to meet interest payments. |